Barbara’s Blog

Taxes may already be a fond memory for you if you’ve filed your 2011 tax returns, but unfortunately there’s no time to rest. The clock keeps ticking as tax obligations continue unabated for this year and beyond. According to a recent NFIB survey, tax uncertainty continues to plague small business.

Here are some of the survey’s findings:

• 20% of small business cited taxes as the single most important problem facing them today.
• 22% said it is the single most important external impediment to growth.
• Small businesses spend on average $74 per hour to comply with the federal tax code, which is the most expensive paperwork burden imposed on small businesses by the federal government.
• 88% of small business owners use paid preparers to complete their tax returns.

What does this uncertainty do to small business and the economy? The NFIB fact sheet says that it

“hinders long term planning and create[s] uncertainty which prevents small businesses from making investments.”

It drains small businesses of valuable resources that could otherwise be spent on hiring, research, and other activities that would benefit the nation.

What’s up for 2012?

If Congress fails to take action now, the more than four dozen tax breaks that expired at the end of 2011 will not apply for 2012. This means:

• Many small business owners will owe the alternative minimum tax (AMT), especially those living in high-income tax states; higher taxes on owners means less money for hiring, etc.
• Businesses won’t be able to claim the research credit or many employment-related tax credits; the incentives won’t be there to incentivize.

What’s up for 2013?

If Congress does not make changes for 2013, it will be “taxmaggedon.” What to expect in the absence of any Congressional action:

• The Bush-era tax cuts will expire. This pushes the top tax rate up to 39.6%, the capital gains rate to 20%, and many other unfavorable tax rules.
• The Medicare surtaxes on earned and unearned income (as created by the Patient Protection and Affordable Care Act of 2010) will take effect for the first time.

What to do!

Become political. Whether you fall on the left or the right, you must urge your representatives to act. Just like a parent’s torment when a child goes missing, the uncertainty (not knowing what the tax rules will be) is killing us.

Today, 52% of small businesses are home based. Working from home may entitle an owner to treat a portion of personal living expenses as a deductible business expense called a home office deduction.

There are certain misconceptions about this write-off that I hope to clear up:

Myth 1: Minimal personal use won’t disqualify a home office.

Reality: Even minimal personal use of space in a home prevents a deduction.  The tax law requires that in order to claim a home office deduction, space must be used regularly and exclusively for business. Exclusive use means use solely for business; use for personal purposes, even one or two time during the year, fails the exclusive use test. So using a den/office a couple of times a year as a family room will prevent a home office deduction for that space.

However, as demonstrated in a recent Tax Court decision, mere nonbusiness passage by a family member, friend, or other nonbusiness person from one room to the next can be classified as a de minimis personal use of the room and will not disqualify the room from meeting the exclusivity test.

Myth 2: Occasional telework or after hours work creates a home office deduction.

Reality: The costs of home office are deductible only if the space is used as the taxpayer’s principal place of business or a place to meet and deal with customers or clients on a regular basis.

Many people spend hours working from home, but it doesn’t mean the costs of the space are tax deductible. Those who telework exclusively (i.e., there is no other fixed location for their work) may be able to take a home office deduction. If they are employees, working from home must be for the convenience of the employer and not merely a personal choice.

Myth 3: Claiming a home office deduction is a red flag for an audit.

Reality: There is no evidence that this deduction exposes a taxpayer to greater audit risk.

If you are entitled to a home office deduction because you meet all tax law requirements (e.g., you are a home-based freelancer who uses a space bedroom solely as an office), then take it.

Suggestion: It’s a good idea to photograph your workspace, just in case your home office deduction is questioned. In the case linked above, several photos showing that part of a room was used for business were considered “reliable evidence” of the business use.

Bottom line
Familiarize yourself with the home office deduction rules (they’re explained in Chapter 18 of J.K. Lasser’s Small Business Taxes 2011). When in doubt about your situation, consult with a tax advisor.


If you’ve been forced by economic conditions during the past two years to lay off workers and have given them various types of severance benefits, you probably paid Social Security and Medicare taxes (FICA) on those benefits. Now a federal district court has opened the possibility of refunds for prior FICA payments on certain payments to terminated workers. 

The problem
FICA—both the employee share and employer share—is owed on payments that constitute “wages.” The definition of the term “wages” is the crux of the problem. During the recent Great Recession, many employers offered terminated workers various types of payments, including severance benefits, downsizing payments, and supplemental unemployment compensation (referred to as SUB-pay). The tax law specifically allows SUB-pay to be structured in such a way as to avoid the “wages” label and, thus, become exempt from FICA.

New development
A recent court decision has extended the SUB-pay exemption from FICA to traditional severance benefits. In Quality Stores, Inc., the court said severance benefits could be treated the same as supplemental unemployment compensation and would not be treated as wages if three conditions are met:

1. There is an employer plan under which payments are made;
2. Workers are involuntarily terminated (temporarily or on a permanent basis); and
3. There is a reduction in the work force, plant closing, or other similar condition that triggers the terminations.

What employers should do now
Companies that have laid off workers in the past several years and paid FICA on severance benefits should meet immediately with their tax advisors to discuss the next step.

Some things to do:

• Determine whether you have a “plan” within the meaning of the law. If you do not have one yet, consider structuring one for any future layoffs. It may pay to work with a benefits expert for this purpose; the FICA tax savings from a properly-structured plan could be substantial if this court decision holds up.
• Look for an appeal of the recent decision. This could take a year or more.
• Consider filing a “protective refund claim” now for FICA that has already been paid. The deadline for employees who were involuntarily terminated in 2006 is April 15, 2010. (It’s too late to claim a refund for FICA paid in years prior to 2006 because of the three-year statute of limitations.) Refund claims are made by filing Form 941X for each quarter in which FICA was paid on such severance payments. The employer can file for the employer share alone, or for the employer and employee share (provided the employee’s share is disbursed to the former employees).

The IRS announced the dollar limits on the amount of depreciation that can be claimed for passenger cars, light trucks, and vans purchased for business and placed in service in 2009. The limits for passenger cars are the same as those in 2008; the limits for light trucks and vans are slightly lower.

The limits for new (not pre-owned) vehicles reflect the $8,000 allowance resulting from 50% bonus depreciation in 2009, for a first-year dollar limit of $10,960 for passenger cars; the limit is only $2,960 for used passenger cars.

Those who lease vehicles valued at more than $18,500 must include an amount (called the “inclusion amount”) in income based on IRS tables. The inclusion amounts for vehicles first leased in 2009 that are used for business are substantially lower than the amounts for vehicles first leased in 2008.

You’ll find details in Rev. Proc. 2009-24, which will be posted in Internal Revenue Bulletin 2009-17.